What is Perfect Market?
A perfect market may be defined as a market where neither the sellers nor buyers can influence the prices of goods and services because they are many in number.
It is also called competitive market or perfect competition. In such a market, identical goods are sold by many sellers at a common price.
Conditions Necessary for a Perfect Market
- Many Sellers And Buyers: This makes it impossible for the buyers or sellers to infuence the prices of goods, through market forces.
- Homogenous Goods: The identical goods will prevent differences in their vices, since there is no sign or trade mark differentiation.
- Free Entry And Exit: Manufacturers, sellers and buyers must not be restricted from entering or leaving the market.
- Adequate Information: Buyers and sellers must always have enough information about the market conditions especially the price prevailing in the market.
- Portable Goods: Thus portability of goods will ensure the same rlces in the market.
- Lack Of Preferentia Treatment: Sellers must treat all buyers in the same way, and at the same time, buyers should not adopt impartiality in their patronage of the sellers.
- Free Movement Of Resources: Resources including factors of production must be freely moved from the manufacturing of one commodity to another.
- The Same Market Ruling Price: Prices of similar commodities must be the same before a market is called a perfect one.
Price and Output Determination under Perfect Competition
The equilibrium price under perfect competition is determined by the interaction of the forces of demand and supply, given that there are many sellers and buyers, such that no one can influence price.
However, output determination is illustrated with the help of the diagram given in image above. In the diagram, the marginal cost (MC) is shown to be U-Shaped and upward sloping, so also is the average cost curve (AC) while the demand curve (DD) is given as a honmntal line.
The demand curve (DD) also represents the marginal revenue curve (MR) as well as the average revenue curve (AR), since under the model all extra units produced or supplied are sold at the same price. As can be seen from the diagram, equilibrium output is determined by equating the marginal cost with the marginal revenue at point B in the diagram.
At any point other than this, the firm is said to be operating inefficiently either making losses or making excess profits.
Conclusions Drawn from Perfect Competition Model
- All firms are price takers i.e. there is only one established equilibrium price and at this price, firms in the industry can produce and sell any quantity they wish.
- There is efficiency in the utilization of societal resources.
- Firms are making normal profits, so consumers are not exploited.
- Marginal cost and marginal revenue rule or pnncnple is used to determine the equilibrium level of output and price.
- Competition is a situation where a number of sellers or manufacturers are striving for their customers.
Advantages of Perfect Competitive Market
- Keep prices of commodities low.
- Keep qualities of goods high.
- Make the whole economic system efficient.
- Ensure that all tastes will be catered for.
- Keep services rendered high and good.
Disadvantages of Perfect Competitive Market
Competition often takes the wrong forms as highlighted below:
- Customers are competed for through expensive advertising.
- Service rendered can, in fact, suffer.
- There are times when the whole competitive situation seems dormant.
- It is wasteful.
- It really gives us what we want.
- Firms concentrate only on their most profitable products.